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Globalizing The New Economy

January 30, 2000

Editorials

Globalizing the New Economy

There are many fallacies and only one essential truth about the New Economy. The first error is that the New Economy is nothing more than a stock market bubble destined to burst. The second is that the New Economy is nothing more than a temporary event caused by unexpected circumstances, such as the Asian financial crisis. The third error is that the New Economy is just a uniquely American experiment that cannot be replicated elsewhere. The truth is rather different. And it is incumbent on leaders in Europe, Asia, and America itself to grasp it as quickly as possible.

For the New Economy is really the latest iteration of a 400-year-old phenomenon: capitalism. And just as mercantilism and industrial capitalism have taken many forms as they have spread from country to country over the centuries, so too will the high-tech, global New Economy evolve and adapt to different countries and regions. In the sweep of history, it mattered little that mercantilism first developed in Holland and Northern Europe or that industrial capitalism first appeared in England. What appears today to be a distinctly "American" phenomenon will have its Continental version, its British variation, and probably several Asian interpretations.

The U.S. has set a new benchmark in capitalism by putting together a completely new combination of technological innovation, open markets, deregulation, and fiscal and monetary policies to create an economy that grows at 4% annually with little inflation and low unemployment. This doesn't mean America will never have another recession or that the stock market won't undergo a correction. The business cycle may be different, but it isn't dead. It does mean that the economy now has a higher speed limit than was once thought possible.GREENSPAN'S VISION

How quickly countries adapt to this reality, what configurations their own New Economies take, and what role they will play in an integrated global New Economy will depend on policies taken by their economic and political elites. India, for example, could continue to be a supplier of software brainpower to America--with Bangalore tied to Silicon Valley--or it might become an Information Age giant in its own right.

If the history of capitalism teaches us anything, it's that nothing is predetermined. For all America's technological prowess, the New Economy might never have developed first in the U.S. had it not been for one man. Federal Reserve Chairman Alan Greenspan understood that a productivity revolution was under way in the 1990s and that this allowed much faster growth than traditional economic models said was possible without igniting inflation.

The Internet now makes technology and the latest business innovation instantly available to anyone, anywhere--almost instantaneously. It has the potential of leveling the global playing field by speeding the flow of information. Throughout Europe, small local economies are already springing up to take advantage of this information flow. Hundreds of new companies are listed on Frankfurt's hot Neuer Markt and other exchanges specializing in fast-growing stocks every year. Big corporations are restructuring, investing huge sums to increase productivity. The advent of the euro is unifying capital markets and sparking a massive wave of mergers and acquisitions. And Europe's penchant for state direction has its advantages: By choosing a single standard, it has forged ahead of the U.S. in digital wireless telecommunications.CHOICES FOR EUROPE

But this is not enough. Integrating isolated pockets of high technology so that Europe as a whole takes off will require much of Continental Europe to end labor rigidities, anti-immigration laws, and anti-entrepreneurial policies. A European New Economy would stop so many of their best and brightest from leaving for Silicon Valley, New York, and London. The European Central Bank, as well as the Bank of England, will have to change. Unlike the Fed, they are still mired in Old Economy thinking, too fearful that strong economic growth inevitably leads to inflation. European central bankers should be aware that it took years for official U.S. government statistics to catch up with the surge in productivity occurring in the real economy. It may be that European government figures on productivity are also underestimating a rise in productivity. So far, Britain appears to be closest to fusing a New Economy mass. Some 10% of families already shop on the Internet, and 40% regularly use it. Japan, too, is taking to the Net with a vengeance: Practically every teenager carries a cell phone that connects to the Net.

Assuming that an American version of the New Economy will be transplanted to Europe and Asia is naive at best, arrogant at worst. Even the shape of America's New Economy is changing rapidly. The purchase of Old Economy media giant Time Warner Inc. by New Economy dynamo America Online Inc. may already be altering how Internet stocks are valued, how Net companies grow, and how the dual economies are integrated. No one can be certain of the evolutionary direction of this new economic force.

Indeed, much needs to be done to make sure the New Economy becomes a global economy. The backlash against globalization so evident in Seattle could easily threaten to close off the flows of trade, capital, and people needed to nurture high-tech growth. Or it could starve certain parts of the global economy and not others, skewing the spread of the New Economy.

As government officials and business leaders gather in Davos, Switzerland, for their annual World Economic Forum, the issue of what the New Economy means for people everywhere looms large. It would be wise for them to avoid the fallacies and concentrate on a single truth: The New Economy is highly adaptable and will take many forms. All nations will be able to enjoy the benefits of fast growth, but world leaders must make the right decisions to get them.